Will Aviation Financing Take Flight Post-Covid Lockdown?

• Published date: 06 July 2020
• Subject Matter: Finance and Banking, Transport, Coronavirus (COVID-19), Financial Services, Aviation, Operational Impacts and Strategy
• Law Firm: Ocorian
• Author: Mr Conor Blake

Director, Conor Blake draws on discussion from our recent aviation finance webinar to highlight that, despite evident distress in the aviation market, there is cause for optimism as it presents opportunities to realise value.

The aviation sector has been particularly hard-hit by the Covid-19 pandemic. The closing of borders and cessation of international travel during the lockdown have presented both airlines and aircraft lessors with a set of extremely challenging circumstances.

The initial flood of requests for rent deferrals by airlines was a sign of significant distress and yet only provided a short-term remedy, an attempt to gain some breathing space.

Some airlines haven't made it - notable businesses going into administration include Virgin Australia and Avianca. In addition, some airlines, such as Lufthansa, TAP and Korean Air, took huge state bailouts as well as payments to furloughed staff. Even American Airlines took US$5bn under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Now leasing companies are examining the credit profiles of their airline customers, noting in particular those that have government support, are financially strong and retain the backing of institutional shareholders.

This was an area that was highlighted by Dominic Pearson, a Partner at Watson Farley & Williams, in our recent webinar titled 'A New Focus for Aviation Financing'. Pearson says that airlines can be broadly split into three categories: at the extremes are those that will go bankrupt, as against those that will survive after three-to-six months of rent deferrals.

For him, the most interesting are those that comprise a middle category who may lease their entire fleet, may not have significant cash reserves and may not be getting cash support from their government, but whose business case is really strong. "It is these airlines that lessors are going to be keen to help find ways to survive the crisis," he says.

The routes navigated by airlines attempting to survive and restructure naturally varies. Investors in Norwegian Air Shuttle backed a US $1.2bn debt-for-equity swap in order to enable the low-cost airline to unlock a state rescue. CityJet took an examinership (the Irish equivalent of Chapter 11 bankruptcy) in order to give time for a scheme of arrangement to be formulated with the airline's creditors, while Virgin Australia went into voluntary administration.

Joe O'Mara, Head of Aviation Finance, Tax Partner, KPMG Ireland, remains...